Weekend Reading for Financial Planners (Sep 6-7)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Weekend reading for September 6th/7th:

Industry Gears Up for Fiduciary September (Melanie Waddell, ThinkAdvisor) - This month has been dubbed "Fiduciary September" as part of a series of events jointly hosted by TD Ameritrade and the Institute for the Fiduciary Standard to bring awareness to fiduciary issues as both the SEC and the Department of Labor continue to consider potential fiduciary rulemaking. Members of the Institute will be meeting with SEC officials in September as the organization considers a "threshold decision" of whether to move ahead on a uniform fiduciary standard, and joint events including a recognition event for former CFTC chairman Gary Gensler to be awarded the 2014 Frankel Fiduciary Prize, and a Fiduciary Leadership Summit in Washington DC on September 15-17 to both advocate for fiduciary with regulators and lawmakers and also to raise the discussion of whether the profession should move forward on its own fiduciary standard if regulators will not do it themselves. Other events include a series of 3 webinars on fiduciary issues, and the launch of a "Best Interest Investing" podcast with Vanguard founder Jack Bogle as the first invited guest.

CFP Board Seeks Camardas' Full Client List, and Claims Camardas Product Useless Documents (Ann Marsh, Financial Planning magazine) - The latest in the ongoing case of the Camardas versus the CFP Board is that the CFP Board has requested that the Camardas turn over their full client list, a request that is raising some questions both because the Camardas have never actually been accused of client mistreatment, and also the request could potentially run afoul of the SEC's Regulation S-P, which protects the privacy of client information (although exceptions do apply if necessary to comply with a legal requirement to provide the information). The CFP Board insists that the information is necessary to defend itself in the Camarda lawsuit, particularly regarding the antitrust aspects the Camardas have raised in their suit, and securities attorneys suggest that the request is simply a "good, aggressive tactic", but even advisors interviewed for the article raise the question of whether the CFP Board is going too far in its request. In a follow-up story, the CFP Board is also complaining that as the Camardas are turning over information in discovery, a whopping 70% of the 13,000 pages are duplicate copies and almost 95% of the documents are materials already in the CFP Board's possession (including 17 copies of a 14-page section of the CFP Board's own rules and procedures and 8 copies of the 136-page transcript of the CFP Board's own disciplinary hearing). In response, the Camardas' spokesman has pointed out that duplicates of documents happen routinely as a part of discovery and going through files, and that many of the 375,000 documents the CFP Board "dumped" on the Camardas on May 23rd were also duplicates. As of now, the Camardas still have a motion outstanding with the court to clarify what further documents must be provided in discovery, and although discovery is scheduled to be completed by October 31st, the Camardas are now requesting an extension of the deadline to have time to comply.

Investors See 'Fee Only' & 'No Commission' as Interchangable (Megan Leonhardt, Wealth Management) - A new study from Pershing entitled "What Do Top Advisors Say and What Do Investors Really Think" has found that advisors trying to differentiate themselves by marketing as "fee-only" may not be helping themselves. The results found that while consumers already using an advisor that is fee-only value the messaging "we provide advice free from conflicts of interest because we take no commissions", those who already use a commission-based advisor are far less likely to find the message compelling. Even more problematic, though, was that 60% of investors thought all advisors were basically saying the same thing and had trouble differentiating between them at all; the study found that the most commonly used phrases to differentiate were "develop solutions that meet your needs" and that the most common differentiation selling point for firms was their "independence", but that so many firms used the same common phrases there was little actual differentiation. Other notable findings from the study: phrases like "simplify your life" may be positively perceived by younger and high-net-worth clients, but many just found it to imply an oversimplification of their complex actual needs and already realize they will have to take a more active role in their financial lives; investors don't see significance in the specific phrase "fee-only" and find the term "no commission" to be interchangeable; and that the most important themes that resonate were around trust (e.g., integrity and accountability).

Can Retirees Still Use a 4% Withdrawal Rate? Practical Applications of Monte Carlo Analysis (Wade Pfau & David Blanchett, Advisor Perspectives) - Continuing on their prior week's discussion of Monte Carlo analysis, Pfau and Blanchett continue to make the case for the value of Monte Carlo analysis over merely using spreadsheets with average return assumptions, or solely testing the robustness of plans with worst-case scenarios. For instance, the popular "Trinity" study on safe withdrawal rates found that a 4% rule has a 95% chance of success, but it was based on rolling historical simulations that are especially sensitivity to the bond volatility of the 1970s (the 95% success rate goes to 100% if government bonds are substituted for corporate bonds) because the data in the middle of the rolling periods gets sampled more often. By contrast, Monte Carlo projections treat each data point more equally by simply using the historical data set once to create a consistent set of parameters for all the random trials, allowing the analysis to cover a wider range of potential results than "just" the 59 rolling 30-year periods from 1926 to the present day, including still acknowledging the potential for failure with stock/government-bond combinations that "worked" in the 1970s. Another benefit to Monte Carlo is that the return parameters can be adjusted to recognize current initial market conditions today, rather than heavily incorporating data points from the past that may have no relevance to the present (e.g., does it really matter that bond returns were double digits in the early 1980s when they're clearly not today?) - which is important, because Pfau and Blanchett contend that using today's market conditions suggests that even the 4% rule may be at some risk (especially bond-heavy portfolios given current low bond yields). Another notable point - while Monte Carlo is often criticized for not modeling so-called "fat tail" returns in the short-term, the greatest problem with current software may actually be its lack of modeling mean reversion in the long run, which can actually improve the results and cause the risk of failure to be overstated.

What Might Social Security Look Like in 20 Years? (Sean Williams, Motley Fool) - Given the current projections that the Social Security trust fund will be depleted somewhere around the year 2033, beyond which then-current payroll taxes will only be able to pay about 75% of promised benefits, this article looks at a number of the proposals on the table to fix Social Security, and how different the system may (or may not) look in 20 years. The first option is simply the "do nothing" scenario, where the trust fund really is allowed to be fully depleted; notably, though, this does not mean Social Security in the aggregate is bankrupt, and simply means that benefits will be haircut by about 25%, to the amount that can be covered solely by payroll taxes being collected at that time. In the "do something" camp, leading proposals include: 1) simply boost payroll taxes, which have been 6.2% for employees (and another 6.2% for employers) since 1990, and according to one study (from early 2013) by the National Academy of Social Insurance would "just" need to be increased to 7.6% to keep Social Security benefits fully paid for another 75 years; 2) eliminate the cap on taxable earnings, which currently limits the 6.2% payroll tax to only the first $117,000 of earnings (this is estimated to close not all, but 71% of the Social Security funding gap); 3) raise the normal retirement age (which is currently 66, phasing in to be 67 for those born after 1960), as a one year increase (to age 68) would reduce the funding gap by 15% and raising it 3 years (to age 70) would cut the funding gap by 25%; and 4) means-testing for beneficiaries, which is rated as unlikely as it is highly unpopular with voters if "everyone" pays into the Social Security but some get nothing back for their contributions. Ultimately, the solution is likely to be some combination of these options, but the question remains about which ones will be implemented and with what mixture.

Revenge of the Variable Annuity (Michael Finke, Research magazine) - The recent Wharton Pension Research Council conference spent time visioning the future of pensions, defined benefit, and defined contribution plans over the next 40 years, and the somewhat surprising conclusion was that the future looks a lot like variable annuities. Not necessarily a precise replica of the variable annuities of the past decade or two (which Finke harshly characterizes as either "a tax shelter for the rich or a complex financial instrument that resembles a structured product with features that make it more attractive in a sales pitch"), but similar in concept at least - a solution that allows funds to be at least partially invested in equities to capture the equity risk premiums (unlike typical fixed/immediate annuities), paired together with a longevity guarantee (for those who live longer than expected), a systematic way to extract retirement income, and some kind of (collective or government?) backing to keep consumers immune to firm-specific default. Notably, Finke suggests that the point shouldn't necessarily be to produce a flat stable guaranteed income from a volatile base, and that some level of income volatility should be accepted even after retirement, which still allows for long-term growth but makes the solution less risky for pension funds or insurance companies by transferring at least some investment risk to the annuitant (a challenge that many of today's pension funds really are suffering from as investment returns have been weak). Nonetheless, the ultimate goal is to pair together three key aspects: the potential for growth and long-term (equity) returns, (some) variability of income so the solution doesn't blow up for the insurer, and the ability to pool longevity risk so that retirees don't have to deal with uncertain retirement/investment time horizons. While this may sound similar to today's variable annuity guarantees, Finke notes recent research finding that today's guarantees just don't offer an effective trade-off (especially due to their inability to provide guarantees that keep pace with inflation in the later years); some further product innovation and development for variable annuities is still needed.

Google Has Killed the Generalist (Ryan Hanley, Ryan Hanley blog) - As consumers search for answers using Google, the search engine giant has increasingly focused its efforts on trying to determine who is an "authority" on a particular subject to ensure that its search results are accurate and credible. And a key aspect of Google's philosophy is that it presumes "real" authorities will likely only really be an authority on one key thing that they do really, really well, and has found that consumers generally don't even want generalist results because they'll usually trying to find an answer to a problem, question, or need (which specialists typically answer better than generalists). Accordingly, this means a generalist who has content and information on their website regarding lots and lots of different topics/services/solutions on their website are unlikely to rank well and drive much search traffic with any of it. Even worse, to the extent that some "generalist" results do show up, marketing research finds that people who are entering generalized searches are probably only at the beginning of their journey and search for information, not near the finish; in other words, they might read your site for background while they're getting familiar with a topic, but they're likely to search further and deeper before making a final decision to act, which means they'll probably be on some other (specialist) site when they actually make a decision about who to work with/buy from. And given that Google also has a stronger potential to serve ads (where it ultimately makes its money) tied to more focused and specialized searches, the trend towards Google supporting specialization over generalists is unlikely to end anytime soon. The bottom line: if you want to have success marketing your business online, focus on whatever you do best/most effectively/most profitably and demonstrate your specialized expertise there, because Google isn't going to help you as long as you're trying to be everything to everyone.

Want to Be a Thought Leader? Here's How (Marie Swift, Financial Planning magazine) - The buzzword du jour in marketing these days is to become a "thought leader" but Swift suggests that the term is at risk of losing its meaning as every special report or merely a longish article is becoming a "thought leadership white paper", even though most don't really add much original thought leadership to the conversation. What constitutes true thought leadership then? Drawing on the book "Profitable Brilliance: How Professional Services Firms Become Thought Leaders" the term is defined as "A thought leader is an individual or firm that prospects, clients, referral sources, intermediaries and even competitors recognize as one of the foremost authorities in selected areas of specialization, resulting in its being the go-to individual or organization for said expertise." While the bar is high, Swift suggests that success as a thought leader is worthwhile, as once recognized there may be opportunities to get quoted by the media which in turn provides a "halo effect" that can enhance the perceived credibility of the advisor.  So how do you pursue the strategy? Swift suggests that the starting point is to create specialized content for your target market, that shares your genuinely unique insights (if you don't have any unique insights, target more closely and study more deeply!); the content can be created by whatever means works for you (audio, video, written, multimedia). Once the content is created, publish it first on your own "marketing hub" (e.g., your website and/or blog), and then share it on social media channels that link back to your hub as the source. Then reach out to media publications (e.g., news outlets or websites that are more visible/popular than your own) to share your best insights that most clearly demonstrate your expertise to their broader audience. The ultimate goal: to become "slightly famous" as a recognized expert in your target market/community, which makes you top-of-mind in the select circles where you want to get referrals.

Marketing Tricks to Reach Gen Y (Dave Grant, Financial Planning magazine) - Traditional referrals may be a reasonable means of finding traditional clients, but for firms that actually want to reach a younger demographic, a different approach may be necessary. Some alternative approaches used by younger advisors to reach a younger clientele include: finding a local "mastermind" group to connect with other business owners or people with shared interests, and building relationships that can be leveraged further (for instance, being interviewed on another member's website or podcast); create content relevant to the younger Gen Y demographic and reach out to websites that have an appropriate audience and would be potentially interested in quality (financial) content; created on-demand educational videos and a subscription newsletter service to begin delivering value and building a connection with prospects; don't discount the value of face-to-face, but make sure you go to where your target clientele really are and build connections there (if you're targeting teachers, go to a teacher's conference; if you're targeting young female professionals, go to a yoga studio, etc.).

Reality Check: You're Not So Client Centric (Glenn Kautt, Financial Planning magazine) - While most advisors pride themselves on being sensitive to their client needs and putting their clients first, Kautt makes the case (based on the writings of Wharton professor Peter Fader in his book "Customer Centricity") that being "client centric" is about more than just trying to give clients good service; instead, it's "a focused business strategy that aligns a company's products and services with the needs of its most valuable customers." Or as Kautt puts it, the rule shouldn't be "the client is always right" but "the right client is always be right". Put in real world context, this means that companies like Walmart or Costco, Apple or Starbucks, are not actually customer-centric; they are product-centric, and do an admittedly excellent job trying to deliver the best products at the best price/value while maximizing the profit margin of the firm. But that's actually the point - their solutions are ultimately about making and selling the product, not actually about the customer experience. By contrast, companies like Harrah's Hotels, Rolls-Royce, and Neiman Marcus are examples Kautt cites as being specifically focused on specialized services and customized experiences for a select client, which allows them to be truly customer-/client-centric on those they serve. The key distinction is that a customer-/client-centric business recognizes that not all clients are equally valuable, and truly tries to build the best solution for the best client. In turn, this requires knowing who your "best" clients are, and Kauff discusses how his firm determines this via their CRM using a wide range of tracked metrics, from AUM and referrals to longevity, ease of working with them, required level of effort, and center of influence impact. By focusing on those clients, who can bring the highest lifetime value as a client, the firm becomes truly client-centric.

A Household Variable: The Holy Grail for the Planning Profession (Rick Adkins, Journal of Financial Planning) - This article makes the interesting point that when it comes to money and investments, all of today's software and technology are remarkably account-centric. While this might be fine for financial services product vendors, it creates significant challenges for financial planners who deal not with mere accounts but with entire households that own multiple investment/bank accounts. Thus, for instance, Adkins suggests it's ridiculous that as advisors it's so difficult for us to get a consolidated perspective on the net cash flows of a household; we just see lists of accounts with cash flows in and out of each individual account, even if the reality is that all the flows are just internal transfers amongst the client's own accounts. When working amongst multiple vendors or custodians, the problem can get even more complex, potentially requiring multiple software platforms and databases to handle the discreet account-specific data sets, and because there's no common household identifier trying to import data from multiple systems into one central platform (e.g., an advisor's CRM) can end out creating multiple records. Within a particular vendor, the solution might be to "tag" or "group" accounts, but this usually only works one vendor at a time, and is not universal across them all. Trying to use something like a tax ID or Social Security number or last name or email address won't work either, because by definition a household typically has multiple people who thus have multiple tax IDs/SSNs/names/emails. The ultimate point - Adkins suggests that what financial planning really needs to do better work for clients is a standard "household variable", a unique identifier that's specific to a client's household but can be associated with all accounts across all vendors to easily view the entire household balance sheet and cash flow statement on a consolidated basis.

Ranking the Top 10 “Differentiators” for Advisory Firms (Bob Veres, Advisor Perspectives) - As more and more advisors continue to struggle with a lack of differentiation, or what even constitutes a differentiator in the first place, Veres has assembled a list of what he views as the top 10 differentiators that advisors are using in their positioning and marketing. The list (ranked from least to most valuable) includes: national/global branding of the firm (e.g., working in the branch/local office of a major financial services firm that advertises nationally, which Veres notes may be more beneficial for newer advisors who need credibility than seasoned advisors who have existing client relationships); prior investment performance (risky because it may not persist, but clearly for some advisors good performance results does differentiate); packaging (a really cool website, blog, digital presence, or perhaps physical office, which Veres suggests will probably be more important going forward); investment approach (e.g., being passive indexers, or DFA advocates, etc.); designations/certifications (while few designations have much consumer awareness beyond perhaps CFP and being a CPA, arguably a minimum designation to connote professional status may be coming in the future); years in the business and experience (difference between 1 and 10 years of experience probalby matters, but anything that is 10+ years may not be very differentiated); compensation model (e.g., being "fee-only"); area of specialty/niche (few advisory firms have them, but those that do say it provides a powerful advantage, and Veres suggests this too will become more important in the future); reputation in the community (which supports credibility and can drive referrals); and a close relationship with existing clients (as according to Julie Littlechild of Advisor Impact, engagement with clients is the top driver of referrals). For those who want to dispute the list, change it, or think something is missing, Veres invites feedback in the APViewpoint discussion area and indicates he will do a follow-up article based on the responses.

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!

In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!